(Bloomberg) -- Treasury yields surged as data showing strength in US business activity and a tight labor market sparked traders to push back the timing for Federal Reserve interest-rate cuts until the end of this year.

The Fed-policy sensitive two-year yield rose more than 8 basis points to touch 4.955%, its highest since May 2, before easing a touch late in New York. Meanwhile, rates across maturities were up at least 5 basis points, causing the yield curve to flatten. Trading volume was below average heading into a long weekend, with US markets set to shut Monday for Memorial Day. 

Data Thursday showed US business activity accelerated in early May at the fastest pace in two years. That came on the heels of a report showing initial applications for US unemployment benefits fell last week.

“The short end is fearful of the Fed,” said Andrew Brenner, head of international fixed income at NatAlliance Securities LLC.

Overnight index swaps contracts tied to upcoming Fed policy meetings now fully price in a full quarter-point rate in December, versus November a day earlier. And for all of 2024, the contracts imply a total of 33 basis points of rate reductions — compared to around 39 basis points at the close on Wednesday.

The added pressure on Treasuries comes after selling Wednesday following the release of minutes from the Fed’s latest policy meeting, which showed “many” officials questioning whether policy was restrictive enough to bring inflation down to target.

“The minutes show many participants are uncertain about the degree of how restrictive the policy rate is,” said David Rogal, portfolio manager, fundamental fixed income group at BlackRock. 

He said the yield curve likely remains in a flattening trend if the economy holds up, and this week the gap between two, and 10-year yields has shifted to its most inverted level since early April. A rising two-year yield is around 0.46% above the 10-year note, up from a low of 0.3% earlier this month. 

“If the Fed is going to do a mid-cycle adjustment, which is our base case, they’re not necessarily going into an easing cycle and that’s based on our view of the economy staying fairly resilient, then it’s hard for the curve to steepen beyond the forward rates because they’re not taking policy below neutral,” said Rogal.

The rise in yields after the data releases also pushed up inflation-adjusted, or real yields, ahead of a $16 billion sale of 10-year inflation protected securities. In spite of that concession, the sale arrived at 2.184%, about 2.4 basis points above the level indicated at the 1pm New York bidding deadline. That result reflected less demand than expected. In the wake of the auction, 10-year real yields climbed to a session high of 2.166%,  up 8 basis points. 

(Updates price levels throughout.)

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